My Turn: State permanent fund will weather this storm

Posted: Thursday, November 27, 2008

By PATRICK GALVIN

Global financial markets are in the midst of turmoil unseen in the past 75 years. Given this recent investment climate, it is no surprise that the Alaska Permanent Fund has been hit with similar losses as those that have affected other large investments funds, as well as businesses and individual retirement accounts around the world.

As a member of the permanent fund's Board of Trustees, I believe that Alaskans deserve to know how the board is responding.

An opinion column ran recently in the Juneau Empire in which the writer suggested that the Alaska Permanent Fund Corporation (APFC) staff and board had not responded to the current market crisis and its effect on the permanent fund. The writer even suggested that this lack of response was possibly the result of Gov. Sarah Palin being out of state and thus not here to give direction to the trustees to take action. The accusation is not only unfair to Palin, but a dangerous suggestion that any Alaska governor should play a direct role in making investment decisions for the permanent fund. Alaska law properly shields the management of the permanent fund from the forces of politics and popular opinion. As their terms expire, Palin appoints the public board members, and then must step back and allow the board to do its job.

When the board sets the permanent fund's investment strategy (known as its "asset allocation"), we do not focus on short-term market conditions. We focus on the long term, building a portfolio that is well diversified and will help the permanent fund maximize return while minimizing risk over time. The asset allocation is re-set at least once a year, and is based on input from a large number of advisers, both inside and outside the APFC. We do not attempt to "guess" or "bet" on the overall market, individual stocks and bonds, or on which class of assets looks the strongest for the coming year. Instead, we adopt an asset allocation that will provide the best risk-reward balance we can create, knowing the markets could move in any number of directions.

Markets do move, constantly changing the value of the assets we hold. When this happens, the need arises to "rebalance" the permanent fund's assets to bring them back in line with the adopted asset allocation. This means we sell from the investment classes that are doing well (thus becoming too large a percentage of the permanent fund's overall value), and buy from the investment classes that are under their asset allocation range.

Given the significant drop in value across a number of our asset classes, the permanent fund has recently gone out of balance from our established asset allocation. The opinion writer suggested that because the staff had not immediately rebalanced the permanent fund, the board had abandoned the policy of rebalancing. This is not the case. Rebalancing is an important discipline. However, there should be careful thought and strategy in the implementation of rebalancing efforts, with careful consideration of the timing, magnitude and sources of rebalancing. The board looks to APFC staff to identify the most advantageous methods to achieve rebalance, and to involve the board if there are policy decisions needed. It is no surprise that given the unprecedented nature of recent market movement, staff is carefully evaluating the implementation options for rebalancing.

The opinion writer also suggests that the governor's office has not been responsive to other administrative issues facing the APFC. Again, this is not true. A question was raised internally regarding whether moneys could legally be paid out of the permanent fund to cover the APFC's operating expenses when the permanent fund's value has declined to such a large degree. The APFC sought guidance from the governor's office, and within a week received confirmation that both the Office of Management and Budget and the Department of Law agreed with the APFC's interpretation of our operating statutes.

Alaskans can take comfort that the Permanent Fund Board of Trustees is well aware of the issues currently facing the global markets in general, and the permanent fund in particular. We are working with our professional staff and consultants to respond appropriately to weather this storm and protect the permanent fund for Alaskans' long-term benefit.

 Patrick Galvin is the commissioner of Revenue for the state of Alaska and a member of the Permanent Fund Corporation Board of Trustees. The next Board of Trustees meeting will be held in Anchorage on December 2 and 3.